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Rio Tinto closes in on $21b Simandou deal

John Kehoe

The $21 billion joint-venture includes plans for Guinea's first high-grade iron ore mine, a 650 kilometre railway line and multi-purpose port.

Rio Tinto is poised to ink within the next fortnight a long-awaited investment agreement for the stalled $US20 billion ($21 billion) Simandou iron ore project in Guinea, which chief ­executive Sam Walsh said would inject "renewed momentum" into the ­development.

Rio has been locked in negotiations with Guinea's new Conde government, Chinalco and the World Bank's ­International Finance Corporation on the controversial project.

Mr Walsh said over the weekend he expects to sign an investment framework this month with the three parties for Simandou – the world's richest undeveloped iron ore deposit – which would be Africa's largest-ever ­infrastructure project.

The $21 billion joint-venture includes plans for Guinea's first high-grade iron ore mine, a 650 kilometre railway line and multi-purpose port.

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Mr Walsh was speaking in Washington over the weekend on the potential for infrastructure development in emerging economies as part of ­Australia's promotion of its G20 ­presidency agenda.

"Later this month, we expect to sign the investment framework that formalises our partnership with the government of Guinea, Chinalco and the IFC [International Finance Corporation]," Mr Walsh said.

"This has taken quite some time to bring to fruition. I think that signing this will inject the project with renewed momentum."

Simandou, the world's largest untapped high grade iron ore resource, has been a troublesome investment for Rio.

The former military led Guinea ­government expropriated the northern half of the tenements controlled by the Anglo-Australian miner in 2008.

Brazilian iron ore rival Vale ended up buying two of the four Simandou ­tenements from a middle man who acquired Rio's relinquished stakes from former presidential dictator Lansana Conté.

Those events are now the subject of corruption allegations in a United States court. Rio has accused Vale of racketeering, conspiracy, fraud, ­bribery, money laundering, witness tampering and theft. Vale has denied wrong doing.

Rio still controls two of the four Simandou blocks. It is pressing ahead with plans to develop the project now that Guinea has its first democratically elected government that has adopted acceptable transparency rules for investment.

Mr Walsh said to build confidence among foreign investors and the public in host countries, governments must adopt strong anti-corruption laws and prosecute violators.

"Unless you get corruption solved, all of the development you are putting in is going to be wasted," Mr Walsh said.

GUINEA POTENTIAL

Rio believes the planned 100-million-tonnes-a-year project can sustain a mine life in excess of 40 years and has the potential to make Guinea one of the world's top iron-ore exporters.

"It is a highly prospective project that will produce high-grade ore that the world needs," Mr Walsh said.

The project entity Simfer controlling the licence is 50 per cent owned by Rio, 45 per cent controlled owned by ­Chinese aluminium company Chinalco and 5 per cent owned by the World Bank's International Finance ­Corporation. The imminent signing of the investment framework would mark a step towards developing Simandou, before a feasibility study and a final investment decision by the Rio board and its project partners.

Investment frameworks typically include legal and commercial details about the ownership structure and tax arrangements. Once signed, the investment framework would need to be ratified by the Guinea parliament.

If it proceeds, Mr Walsh said the ­construction would probably take about four to five years with exports flowing to Chinalco and other iron-ore customers before the end of ­this decade.

The project has been delayed as Guinea grapples with the single biggest project in its history.

Rio signed a settlement agreement with the Guinea democratic government in 2011 and said at the time it planned to ship iron ore by mid-2015.

As well as building badly-needed infrastructure including roads and power for the impoverished country, the development of the 2 billion tonne deposit would deliver thousands of jobs and income to the economy.

Rio estimates that once fully ­operational, Simandou will contribute $US7.6 billion a year to the Guinea economy and $US1.2 billion in annual tax and royalties.

There will be an income tax holiday of eight years from the first taxable profit.

Under the terms of the existing agreement the government has the right to eventually take a stake of up to 35 per cent in the mine.

The government originally planned to take a 51 per cent stake in the ­infrastructure joint venture to develop the railway and port.

However, the new framework will shift infrastructure responsibilities to third-party providers to construct, finance and operate the connecting multi-purpose rail and deep water port, which comprise more than half of the total ­construction cost.

MAXIMISING DEVELOPMENT

The IFC has signed a cooperation agreement with Rio, to validate that the project meets acceptable standards for the environment, safety, health and local procurement.The IFC has committed $US180 million to the joint venture.

"One of the most important aspects of the project for us is to make sure it maximises economic development along the railway corridor and during construction," said Tom Butler, global head of mining at the IFC.

"It's critically important that people in the country see the benefit of the project for them and that the project enjoys the support of the population."

The railway line passing through the Guinea mountain range and fertile farming areas will be used for hauling iron ore, as well as agriculture, freight and passengers.

Rio has been working on Simandou for 18 years and spent $US3 billion so far.

Michael Elliott, president of ONE Campaign which fights against extreme poverty, said the key to fair and effective investment by multinationals in developing countries was "absolute transparency" on reporting and contracts.

Rio last year committed to new reporting transparency on taxes paid at the federal, state and local levels in jurisdictions where it operates so people in those countries can track the flow of funds and understand if they are being used responsibly by governments.

Mr Walsh was in Washington to promote Australia's presidency of the G20 and to meet key American decision makers.

He attended a lunch with President Barack Obama's G20 sherpa Caroline Atkinson and Business 20 (B20) peers. Mr Walsh also met with US Senator John McCain, who represents the state of Arizona where Rio operates the Resolution Copper project.

Prime Minister Tony Abbott has made infrastructure a key agenda item for G20 leaders this year.